Network Effects, Switching Costs, and Underlying Preferences inOperating Systems for Servers: A Case of Linux vs. Windows

We seek to investigate to what extent network effects and switchingcosts affect the decision to adopt Linux or Windows as the operatingsystem for computer servers. To this end, we use detailed survey data ofover 100,000 establishments in the United States. To account forunobserved preferences for either operating system, we employ recentlydeveloped dynamic discrete choice panel data methods (Arellano andCarrasco 2003). The results from our empirical analysis suggest thatamong network effects, switching costs, and unobserved preferences, thelast two are important factors in the market for operating systems forservers. We find that switching costs are significant, but can beseverely overestimated by methods that do not account for unobservedheterogeneity in establishment-specific tastes for operating systems. Wealso find that once taste heterogeneity is taken into account, networkeffects are not significant.